Santos (ASX: STO) Clears A$363M Debt: Is Australia's Gas Giant Ready to Reward Shareholders?

Santos (ASX: STO) surprised the market yesterday with not one, but three announcements. The company paid off A$363 million in PNG LNG debt six months early, sold its Mahalo gas project stake, and wrapped up the sale of its Bonaparte Basin assets. All in one day.

The timing raises an obvious question. Oil prices are sitting near four-year lows. Why would Santos rush to clean house right now? The answer likely lies in what's coming next.

Global Energy Markets Are Shifting

The near-term picture for ASX energy stocks isn't pretty. Brent crude is hovering around US$59 per barrel, while WTI trades near US$55- levels we haven't seen since early 2021. Brent has fallen roughly 20% this year.

Several forces are at play. Peace talks between Russia and Ukraine have sparked hopes that Russian oil restrictions might ease, potentially flooding an already oversupplied market. OPEC+ has paused planned output increases for early 2026, but the group faces pressure as non-OPEC producers (particularly in the Americas) continue ramping up. Meanwhile, China's economy continues to disappoint, weighing on global demand.

But here's what often gets overlooked: the long-term outlook for Australian LNG remains strong. Asia's gas demand is projected to grow significantly over the next decade as economies transition away from coal. Australia's proximity to these markets gives local producers like Santos a natural advantage; shorter shipping routes mean lower costs and higher reliability. For patient investors, the current weakness may be creating an opportunity.

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Why Santos Is Cleaning Up Now

Santos isn't paying down debt because things are bad. It's doing so because things are about to get much busier.

With the PNG LNG facility now fully repaid, Santos has zero scheduled debt maturities in 2026. The company reports liquidity of around US$4.0 billion and an average debt maturity of approximately five years.

CEO Kevin Gallagher put it simply: The balance sheet is being strengthened "at a time when our major development projects enter production."

The asset sales tell the same story. Santos sold its 42.86% stake in the Mahalo Joint Venture to Comet Ridge for A$40 million upfront, with up to A$20 million more tied to future production. It also offloaded its Bonaparte Basin interests to Eni Australia. These weren't core assets; selling them frees up capital and cuts future cleanup costs.

The Real Catalyst: Production Is About to Jump

This is where the story shifts from defence to offence. Santos' Barossa LNG project achieved first gas in September 2025. The first LNG cargo is expected before year-end. Meanwhile, the Pikka Phase 1 project in Alaska is approximately 90% complete and remains on track for first oil in early 2026.

Combined, these two projects are expected to lift Santos' production by around 30% by 2027. That's a step-change in output and, importantly, cash generation.

Brokers are taking notice. Macquarie recently set a price target of A$8.15 for Santos, roughly 35% above current levels, citing the imminent delivery of Barossa and Pikka as key catalysts.

What This Means for Dividends

Here's where income investors should pay attention.

In 2024, Santos returned 40% of its free cash flow to shareholders. The company has committed to increasing this to at least 60% of all-in free cash flow generated from the start of 2026. If the balance sheet remains strong with gearing within or below the 15% to 25% target range, the company has flagged the potential to return up to 100% of free cash flow through dividends and buybacks.

At the current share price of around A$6.04, Santos offers a dividend yield of roughly 5.6% to 6.4%. That's above its five-year average. And with production set to grow, there's a reasonable case that payouts could increase further into 2027 and beyond.

Risks Worth Watching

No investment case is complete without the other side of the coin.

Oil and LNG prices remain volatile. If weakness continues, cash flows will suffer regardless of how much production grows. The Barossa project has also attracted criticism over its carbon footprint, which could create regulatory or reputational headaches. And Santos has now seen three takeover attempts fall through in recent years, leaving some investors questioning the company's long-term strategic direction.

The Bottom Line

Santos is positioning itself for a new chapter. The debt is cleared, non-core assets are gone, and two major projects are about to start generating serious cash.

Key points:

• A$363 million debt repaid early- no maturities due in 2026
• Barossa and Pikka projects- set to boost production by ~30% by 2027
• Dividend policy lifting-  from 40% to 60% of free cash flow
• Current yield above 5.5%- with potential upside as cash flow grows
• Oil price weakness-  remains a near-term headwind

Whether the thesis plays out depends on energy prices and project execution. But for investors comfortable with those risks, Santos appears to be entering 2026 in the strongest financial shape it's had in years.

For comprehensive energy sector analysis, download ASR's free Top-3 Stocks & Market Outlook Report.

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